Financial markets now see a fifth interest rate hike by the Reserve Bank of Australia next week as likely, and a former senior RBA economist argues the impact of higher rates will be spread well beyond the one third of households with mortgages.
Writing for The Conversation, John Hawkins of the University of Canberra says the Reserve Bank is raising rates because inflation has been stubbornly above its 2-3% target for most of the past five years. Annual inflation rose to 4.3% in September from 4.0% in August, while the bank's favoured measure of underlying inflation was 3.7% in the September quarter.
RBA officials have been increasingly vocal about the need to bring inflation down. Deputy Governor Andrew Hauser recently warned that "the inflation outlook looks materially worse than we projected in the August report", and was worried that an increasing share of businesses were losing confidence in the bank's commitment to its target, calling it the "central banker's nightmare". Assistant Governor Sarah Hunter told 60 Minutes the bank's approach: "higher interest rates will work."
Hawkins says the most visible effect, higher mortgage payments, is only the "cash flow" channel, and it is partly offset by households such as retirees who earn more on their savings. Less visibly, higher rates make saving more attractive, raise the cost of borrowing for cars, furniture and whitegoods, deter business investment, and tend to lower the value of assets such as shares and houses. House prices fell 5% in Sydney and Melbourne in the first half of 2026, leaving households feeling less wealthy and less likely to spend.
Another less noticed channel is the exchange rate. Since the RBA began raising rates in February, the official cash rate has increased by 0.75% more than the equivalent in the United States, and the Australian dollar has appreciated from 67 to 70 US cents. The trade-weighted index is at 65, up from around 60 during 2025. Hawkins notes a stronger dollar makes imports such as petrol cheaper, directly lowering prices, but it can also steer spending toward imports and away from locally made goods.
RBA Governor Michele Bullock has commented that "the most important channel is the exchange rate channel", and Hauser has called it "by far the most important in Australia". RBA modelling cited by Hawkins suggests a 1% rate rise could leave real GDP 0.4% to 0.5% lower and inflation 0.1% to 0.2% lower than would otherwise be the case, with the peak effect coming around one to two years after the change.
Hawkins writes that higher rates have damaging side effects: they can deter or defer some business investment, which could also make Australia's productivity performance worse; business investment to boost productivity has been weak in recent years. Unemployment has already risen from 4.3% in February to 4.7% in September. The Reserve Bank, he says, will hope it can get inflation back within its target band fairly quickly so that rates do not have to stay higher for too long.
Analysis
Why This Matters
- Rate decisions affect far more than mortgage repayments: they change the cost of borrowing, the value of houses and shares, the exchange rate and the job market.
- With annual inflation at 4.3% and underlying inflation at 3.7%, both above the RBA's 2-3% target, financial markets expect another hike next week, extending the squeeze.
- The analysis challenges the usual focus on mortgage stress, arguing the exchange rate is the most important channel through which rates cool the economy.
Background
The Reserve Bank began lifting the official cash rate in February and markets now see a fifth hike as likely at the next board meeting. The bank's approach is to slow spending and investment across the economy to bring inflation back to its target band, with the peak effect of rate moves expected one to two years later.
Key Perspectives
RBA officials: Deputy Governor Andrew Hauser, Assistant Governor Sarah Hunter and Governor Michele Bullock have all defended higher rates, with Hunter saying "higher interest rates will work" and Bullock and Hauser calling the exchange rate the most important channel.
Many people (perhaps a majority): according to Hawkins, are sceptical that rate rises bring down inflation, though he maintains it is true nonetheless.
John Hawkins: The former RBA economist argues the burden of rate rises is spread broadly and warns of damaging side effects, including weaker business investment and higher unemployment.
What to Watch
- The RBA board meeting next week and whether it delivers the fifth hike financial markets expect.
- Whether monthly inflation continues to rise after September's jump to 4.3% or starts moving back toward the 2-3% target.
- The unemployment rate, which has risen from 4.3% in February to 4.7% in September as higher rates slow the economy.
Checked
12 claims in this story checked against 1 source: 10 supported.
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- SupportedRBA rate rises spread pain beyond mortgage holders, according to former RBA senior economist John Hawkins.The Conversation – Articles (AU): “But that’s just one of the ways higher rates dampen demand across the economy and help bring down inflation.”
- SupportedHauser warned that “the inflation outlook looks materially worse than we projected in the August report”.The Conversation – Articles (AU): “Deputy Governor Andrew Hauser warned recently that “the inflation outlook looks materially worse than we projected in the August report”.”
- SupportedSarah Hunter said: “higher interest rates will work.”The Conversation – Articles (AU): “She emphasised : “higher interest rates will work.””
- SupportedFinancial markets see a fifth RBA interest rate hike next week as likely.The Conversation – Articles (AU): “A fifth interest rate hike by the Reserve Bank of Australia next week is now seen as likely by financial markets .”
- Not in the sourcesJohn Hawkins is of the University of Canberra.The Conversation – Articles (AU): “John Hawkins was formerly a senior economist at the Reserve Bank.”
- SupportedInflation was 4.3% in September, up from 4.0% in August, while underlying inflation was 3.7% in the September quarter.The Conversation – Articles (AU): “Data this week showed annual inflation has continued to rise, up to 4.3% in September from 4.0% in August. While the RBA’s favoured measure of underlying inflation was 3.7% in the September quarter”
- SupportedHauser called businesses losing confidence in the central bank’s commitment to its inflation target the “central banker’s nightmare”.The Conversation – Articles (AU): “He called it the “central banker’s nightmare”.”
- SupportedHigher rates affect people beyond mortgage holders through savings, borrowing costs, asset values and the Australian dollar.The Conversation – Articles (AU): “The other ways that interest rates work, which affect the broader community rather than just households with mortgages, are: Higher interest rates make saving more attractive”
- SupportedHouse prices fell 5% in Sydney and Melbourne in the first half of 2026.The Conversation – Articles (AU): “In the first half of 2026, house prices have fallen by 5% in Sydney and Melbourne.”
- Partly supportedSince the RBA began raising rates in February, the Australian dollar appreciated from 67 to 70 US cents.The Conversation – Articles (AU): “Since the RBA started raising interest rates in February, the official cash rate has increased by 0.75% more than the equivalent in the United States. And thus far this year, the Australian dollar has appreciated from 67 to 70 US cents”
- SupportedThe trade-weighted index was at 65, up from around 60 during 2025.The Conversation – Articles (AU): “The trade-weighted index , which measures the Aussie dollar against a basket of currencies, is at 65, up from around 60 during 2025.”
- SupportedRBA modelling suggests a 1% rate rise could leave real GDP 0.4% to 0.5% lower and inflation 0.1% to 0.2% lower than otherwise, with peak effects around one to two years later.The Conversation – Articles (AU): “The models suggest real gross domestic product (GDP) could be 0.4% to 0.5% lower, and inflation 0.1 to 0.2% lower, than otherwise following a 1% interest rate hike.”